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Cosmetic tax fails to raise expected revenue in New Jersey, Connecticut starts down similar path

Expect to see a handful of states propose cosmetic procedure taxes this year as they scramble to balance their budgets. Whether these states will choose to learn from New Jersey’s experience, which led to the law there being repealed by a nearly unanimous vote last month, or take Connecticut’s lead to implement one is anybody’s guess.

“States will continue to look at a cosmetic procedure tax because they view it as an easy, quick fix,” said Kathryn Chandra, assistant director of state policy for the American Academy of Dermatology Association. “But once state legislators and regulators realize the complexity of implementing and enforcing such a tax, coupled with patient privacy concerns and determining what is medically necessary or cosmetic, it becomes much less attractive.”

Among the states that considered imposing a cosmetic procedure tax in recent years but decided against it are Arkansas, Illinois, New York, and Tennessee. Last year, efforts to pass a tax on cosmetic procedures in Minnesota, Texas, and Washington failed. Despite significant opposition in Connecticut, a 6.35 percent tax went into effect in July.

New Jersey’s journey

New Jersey’s tax, imposed in 2004, has fallen significantly short of raising the anticipated $24 million in annual revenues. It yielded only $7.8 million in 2005 and $10.8 million the following year while being applied to such procedures as hair transplants, cosmetic injections, cosmetic soft tissue fillers, dermabrasion and chemical peel, laser hair removal, laser skin resurfacing, laser treatment of leg veins, and sclerotherapy. A loss of indirect state taxes due to patients having cosmetic procedures performed in neighboring states without a tax is estimated at an additional $26.4 million, according to the Jasos Group, an Orlando, Fla.-based health care consulting firm. That means for every $1 New Jersey collects on the tax, the state loses $3.39 in total revenue.

For patients who live in some parts of New Jersey, all they have to do is cross a bridge to get to New York, Pennsylvania, or Delaware to have cosmetic procedures that are not taxed, noted Sandra Vause, MD, president of the Dermatological Society of New Jersey (DSNJ). Rod Kaufmann, MD, who practices in Princeton, which is 30 minutes from the Pennsylvania border, hasn’t been significantly impacted by the tax because he doesn’t perform a lot of expensive cosmetic procedures. But some of his colleagues who perform such procedures as liposuction have been negatively affected. “I try to keep business in my community. This tax drives business not only out of the community, but out of the state,” he added.

Enforcement of the tax has been problematic because it involves performing audits of medical practices to determine whether procedures were cosmetic or reconstructive. The review of patient records violates patient privacy and confidentiality, per HIPAA regulations. These records not only contain personal information, such as test and screening results, major illnesses and surgeries, medications, chronic conditions, and a family history of illnesses, but frequently include photographs of the patient, Dr. Vause pointed out. [pagebreak]

Patient care affected

Even more worrisome to dermatologists is that tax auditors lack the medical knowledge to distinguish between cosmetic and constructive procedures. For example, laser treatment and sclerotherapy are used to treat spider veins and varicose veins, the latter of which cause pain, dermatitis, ulceration, and swelling, Dr. Vause explained. If used for spider veins, they are considered cosmetic procedures and therefore subject to the tax. However, if they are deemed medically necessary for the treatment of varicose veins, which commonly have connected spider veins, they should not be taxed. But because the tax does not clearly define cosmetic procedures, the decision of medical necessity is left up to tax auditors, she said. “The physician and patient should be making that decision, not legislators or tax auditors.”

Other cosmetic surgeries that could potentially be taxed are those following reconstructive surgery to improve the appearance of accident victims, laser resurfacing to smooth a disfiguring facial scar resulting from skin cancer surgery, and treatment of HIV-associated facial lipoatrophy.

The tax also raises patient safety concerns. “Everybody is looking for a better deal in this economy. Patients go to a neighboring state for laser hair removal treatments, for example, and come back to us when they get burnt,” Dr. Vause said. “It happens a lot.”

Additionally, the tax undermines the dermatologists’ ability to provide continuity of care. “You can’t take care of the patients the way you want to if they are going elsewhere for some procedures,” Dr. Kaufmann added.

Not just wealthy women

When introduced, the tax was considered a sin tax affecting primarily wealthy people, noted Dr. Kaufmann, who serves on the DSNJ’s Board of Directors and a coalition of New Jersey medical professionals who sought to repeal the tax. “But it impacts patients from all walks of life, not just the upper class,” he said. Patients seeking cosmetic procedures include secretaries, teachers, and nurses. According to the American Society of Plastic Surgeons, 71 percent of individuals seeking plastic surgery earned less than $60,000 a year. Only 10 percent of respondents reported a household income of more than $90,000.

Additionally, women are unfairly burdened by this tax, Dr. Vause noted. According to a survey conducted by the American Society for Dermatologic Surgery, women comprise 83 percent of its members’ minimally invasive cosmetic medical procedure patients.

All of these reasons were cited for years by supporters of the bill signed into law by Gov. Chris Christie (R) on Jan. 17. The law immediately reduced the 6 percent tax by 2 percentage points, with an additional 2 point drop coming July 1 before the tax is finally phased out completely on July 1, 2013. The bill’s sponsor, Assemblyman Gordon Johnson, cited the tax as having imposed “increased overall costs for recipients of cosmetic medical procedures” as well as “an administrative burden on the medical offices billing the procedures and the state agencies charged with the administration and enforcement of the tax.” In 2007, former Gov. Jon Corzine (D) had vetoed a similar tax repeal bill that was unanimously passed by the state legislature. [pagebreak]

Connecticut’s tax

In nearby Connecticut, despite strong opposition by the Connecticut Dermatology and Dermatologic Surgery Society, the State Medical Society, the Connecticut Society of Plastic and Reconstructive Surgeons, and other medical specialty groups, the state passed a cosmetic procedure tax last May. Even the state’s Commissioner of Revenue Services, Kevin Sullivan, has publically stated that the tax would be virtually impossible to regulate, noted Debbie Osborn, executive director of the Connecticut Dermatology and Dermatologic Surgery Society.

The tax is expected to generate $4.1 million in fiscal year 2012 and $4.3 million in 2013. However, according to the Jasos Group, Connecticut may lose an estimated $6.6 million in corporate income tax and an additional $7.2 million in indirect state taxes due to “surgical flight” losses, based on New Jersey’s experience.

“Our society knew from the get-go that it would be a difficult issue to win, first because the deficit was so large in Connecticut and second because we had a Democratic majority in both houses and a newly elected Democratic governor who vowed to reduce the deficit and warned that no one would be spared,” Osborn said. On a positive note, the new law excludes reconstructive surgery, defined as “any surgery performed on abnormal structures caused by or related to congenital defects, developmental abnormalities, trauma, infection, tumors or disease, including procedures to improve function or give a more normal appearance.” So even though the law says that botulinum toxin injections should be taxed, if the physician determines that it is a medically necessary treatment, as in the case of neurological conditions, the cosmetic tax will not apply. “We are still working closely with the Department of Revenue to codify better regulations on this tax,” she added.[pagebreak]

Next steps

The Connecticut Dermatology and Dermatologic Surgery Society plans to survey dermatologists this July, one year after the tax was imposed, to determine its impact on them, Osborn said. “The burden is on us to prove that the tax is a hardship for dermatologists,” she said, adding, “The first time a doctor gets audited, our society will be involved to insure that there are no violations to the HIPAA laws or that no information regarding patient privacy is violated by the state.” Connecticut is already considered one of the worst states in which to practice medicine due to high medical liability premiums and strong managed care lobbyists who prevent effective standards-in-contracting legislation which would help balance out the managed care contracts and make them fairer to the providers, Osborn noted. This tax will contribute further to the decline of dermatologists practicing in the state, she predicted.

The dermatology community must take a proactive stance regarding cosmetic procedure taxes to prevent them from being passed when they are proposed in various states across the country, Dr. Vause said. She encouraged dermatologists interested in legal issues to get involved on state boards and panels to give a voice to dermatologists on such matters.

Additionally, AADA members can access resources through the online state advocacy toolkit on the AAD website, www.aad.org/member-tools-and-benefits/aada-advocacy/state-affairs/advocacy-toolkit, or contact the AADA Government Affairs department. “The AADA has worked collaboratively with the American Society for Dermatologic Surgery, the American Society of Plastic Surgeons, the American Medical Association, and many others to oppose cosmetic medical procedure taxes,” Chandra said. “Together, the Stop Medical Taxes Coalition has developed numerous resources and background materials that explain why this is not a good option to raise state revenue.”

Meanwhile, Osborn hopes that the Connecticut General Assembly will take a page out of New Jersey’s book and reconsider its cosmetic procedure tax. “Many times due to time restraints with regard to legislative deadlines, legislation is pushed through the process without thorough investigation on the long-term implications of a bill. In this case, New Jersey discovered that their neighboring states, such as New York, gained considerable advantage with the passage of a cosmetic tax. Fortunately, the General Assembly acknowledges its miscalculation,” she said. “Time will tell if Connecticut has made the same miscalculation on realized revenue from a cosmetic tax. My guess is that Connecticut has and New York will be the real winner at the end of the tournament.”


Academy offers members help in fight against cosmetic procedure taxes

Dermatologists who want to join the effort to repeal cosmetic procedure taxes, or prevent one from being passed in their state, can turn to the Academy for help. The Academy’s online Advocacy Toolkit, available at www.aad.org/member-tools-and-benefits/aada-advocacy/state-affairs/advocacy-toolkit, provides members with the facts regarding cosmetic medical procedure taxes, as well as documents for use in meeting with state legislators about the issue. Templates for communicating with the media about the issue are also available.


 

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Academy offers members help in fight against cosmetic procedure taxes